Non-compliance with laws, regulations noted in PSM

Non-compliance with laws and regulations in Pakistan Steel Mills Corporation (private) Ltd has been noted by its auditors in their report for the year ended June 30, 2011 available here on Saturday. They have pointed out that as of June 30, 2011 an amount of Rs 3,377 million is payable by the Corporation to Employees Provident Fund Trust (EPFT) on account of following:

—- Provident Fund contributions: The Corporation has not deposited employer”s and employees” contributions. The total amount required to be deposited as at June 30, 2011 amounted to Rs 1,318 million.

—- Provident Fund loan deductions: The Corporation has not deposited the instalments of PF loan deducted from employees” salaries on account of loan obtained by employees from EPFT. The total amount required to be deposited as at June 30, 2011 amounted to Rs 2,059 million. Non-deposit of the above amounts to EPFT is a violation of section 227(3) of the Companies Ordinance, 1984.

Loan from retirement benefit plans: In the financial year 2008-09, the Corporation obtained temporary short-term advances (loans) of Rs 3,610 million and Rs 3,900 million from Gratuity Fund Trust (GFT) and Pakistan Steel Mills Corporation EPFT respectively. Such loans were taken to discharge obligations arising from import of raw materials. GFT loan is interest free which EPFT loan carries interest at rates ranging from 14 percent to 19 percent per annum. The auditors noted that there were no formal agreements between the Corporation and GFT and EPFT. All loans have been sanctioned with the approval of the Chairman of the Corporation and the trustees of the GFT and EPFT. Up-to June 30, 2011, the Corporation had re-paid Rs 513 million and Rs 3,400 million to GFT and EPFT respectively. The auditors noted that all payments made to EPFT have been treated as repayment of principal instead of payment of interest accrued on EPFT loan. Due to this practice EPFT will suffer loss as outstanding balance of interest accrued is interest free.

The auditors observed that the trust deed of EPFT does not include any provision regarding provision of loan to the Corporation. Further sub-section (2) of section 227 of the Companies Ordinance, 1984 has provided certain investment securities/instruments where funds of a Provident Fund can be invested. However, such section does not include any provision which allow the PF to invest in a loan to the Corporation. Therefore, loan from PF to the Corporation is in violation of the trust deed and the Ordinance.

The Board in its meeting held on March 11, 2010 had decided that from March 2010 onwards, five percent of sales” proceeds will be put aside for repayment of loans taken from both funds. Auditors noted that from March 2010 re-payments to EPFT and GFT have been made based on five percent and one percent of cash collected from sale of EPFT and GFT respectively. In the current year, the Board in its meeting held on April 23, 2011 ratified the decision of CEO for eight percent of sales” proceeds to be paid to EPFT.

Utilisation of Staff Welfare Fund: In the year 2005-206, the Corporation transferred fund amounting to Rs 280 million to separate bank account as per the understanding with the Government of Sindh to form Staff Welfare Fund (SWF) for the purpose of installation of medical equipment in the hospital. The fund remained un-utilised as the formalities related to utilisation of the fund could not be finalised. The account was maintained in the bank account therefore, based on the interest earned the account balance increased to Rs 390 million up to August 2010. As the financial position of the Corporation further deteriorated and liquidity position also worsened during the year, the Corporation utilised these funds for its operations and recognised the corresponding liability with the intention that the amount would be returned to the fund when the formalities are completed. Auditors recommended that the Staff Welfare Fund utilised by the Corporation should be returned to the fund on a priority basis.